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Don’t just simplify your contracts

It’s not just about simplifying contracts …. it’s about using contracts to simplify business.

Many people in business are frustrated because contracts are too long, or too complicated, or take ages to negotiate. So they demand ‘simplification’, which often means ‘Why can’t it be one page?’

What these demands fail to recognize is that contracts are a reflection of overall business complexity. Certainly there are aspects of them that can be simplified through better design or drafting, but the majority of the content is driven by policies or practices that are outside the control of the contract author. Examples are the terms that finance, risk management, HR, business operations and product management may require. In my experience, these groups often demand the inclusion of multiple pages of text that reflect their fears, concerns and past exposures.

So does this absolve the contract drafter from responsibility? In my opinion, it does not. It actually provides the drafter with an opportunity to deliver real and measurable value to the business, by challenging all those interest groups (or stakeholders) about the complexity THEY are imposing on the business. It is actually these groups who are undermining ‘ease of doing business’ and creating avoidable cost and delays.

A growing number of IACCM members are awakening to the point that the legal, contracts or commercial function must do more than oversee compliance with rules – it must actually challenge those rules or policies and ensure those which remain are implemented in the simplest way possible. Good contracting is actually about testing and improving overall business performance and eliminating the friction points and delays that cause so much frustration.

We don’t have to be the villains and the fall guys; let’s put pressure on the real creators of complexity.



Why simplify your contracts?

This month’s Harvard Business Review features an article, ‘The Case for Plain-Language Contracts’, by Shawn Burton, General Counsel at GE Aviation. In his introduction, Shawn observes: “The contracts used in business today are long, poorly structured and full of unnecessary and incomprehensible language”. He rightly makes the point that contracts are business documents and should therefore be understandable to the audience for which they are relevant.

This point seems glaringly obvious and the article comments that the push for plain-language contracting goes back many years. One likely reason that progress has been so slow is highlighted in a recent opinion piece published by Forbes, in which Mark Cohen – a Fellow at Northwestern University School of Law – challenges the fact that law operates ‘as a guild, rather than a competitive market’. The system of licensing that this involves means that lawyers ‘have fostered a ‘bespoke myth’ that maintained all legal matters were unique, inherently complex and worthy of premium rates’. Using archaic and complicated language, decipherable only by an expert, is of course a key element of that myth.

Ken Adams, guru of contract style, has unsurprisingly piled in on this topic and makes some justifiable comments about the simplification undertaken at GE Aviation. He suggests some worthy improvements to the wording of the agreement. However, he also bows to traditional thinking when he suggests that because contracts deal with complex matters, they must therefore themselves be complex.

Why does this matter?

Contracts today are pervasive. For a variety of reasons, both the volume and size of contracts have grown dramatically over the last 30 years and this has been accompanied by greater complexity – for example, the increasingly frequent need to to operate across languages, legal systems, cultures, as well as dealing with complicated, long term relationships on challenging and innovative projects – and in an environment of rapid change, heightened uncertainty and growing regulation. However, it is worth noting that the vast majority of those factors are not in themselves anything to do with ‘law’. Contracts – and the process by which they are developed and agreed – shoud be assisting in generating clarity and shared understanding for all those who they affect, not adding to the mystery or uncertainty and being decipherable only by one specific interest group.

Business people need practical business instruments that support successful business outcomes. As Paul Lippe, founder of LegalOnRamp, commented to me just this week: “Contracts today are a roadmap for dispute resolution”. This renders them inadequate – and often irrelevant – when it comes to providing a useful or structured framework for overall governance and performance management. Quite simply, they often fail to assist businesses in dealing with the real business risks that arise during the contract lifecycle. Ironically, this lack of clarity regularly means they are not even particularly useful in dealing with disputes.

It is rarely practical to anticipate every incident or uncertainty that might affect contract performance, but it is entirely practical to anticipate that such incidents are likely to occur. It is in this context that well-designed  contracts provide clarity:

  • for those things where there is certainty, they must offer unambiguous instruction;
  • for those things that deal with uncertainty, they must offer clear guidance on how it will be handled.

The obligation for anyone drafting an agreement – indeed, their test of success – should be that the users of that agreement can understand it.

Complexity is no longer an excuse

Throughout the centuries, complicated ideas or tasks have resulted in the formation of specialist groups or associations. The intent is laudable. It has generally been to raise standards and encourage informed debate and improvement (at least within that specialist group or community). But over time, such groups have always become resistant to change and sought to maintain mystique – the use of Latin within the Catholic church was a case in point, or the Luddites smashing machines was another.

When it comes to contracts, simplified langauge is no longer enough. The world has moved on. Traditional written documents are for many people a thing of the past; they operate in a digital age where communication is through emojis, text-talk, graphics and videos. In many cases, these methods generate far greater understanding and consequently far greater compliance. To take an example, engineering drawings are complex. Just like contracts, they require experts for their interpretation. And that is why engineering drawings in their traditional form are becoming a thing of the past. Whether it is for kitchen re-design or for smart city construction,  virtual reality programming has taken these innately complex concepts and made them fully understandable to the wider public.

Specialists and professionals remain important to human progress, but in order to survive and stay relevant they must focus on how they make their expertise accessible and affordable. In the case of engineers, they may still develop drawings, but these operate as templates for the virtual reality program. Either they expand their skills (to include programming) or they partner with programming experts.

A key measure of future value must surely be that we enable the success of others by making complex things simple for them to understand and implement. Contracts will not be an exception. Already, we are seeing the emergence of more standard terminology and the development of machine-based analytics (the end of the bespoke). We are also seeing growing use of graphics and video – methods through which contracts serve a broader business and social purpose. These developments are exciting to observe – and indeed, many lawyers share that excitement and are operating at the forefront of those changes.




Contract Management: Poised for Transformation

As we enter 2018, the divide between today’s outdated contract management practices and tomorrow’s technology-enabled reality is becoming starkly obvious. It was Warren Buffett who segmented the business world into innovators, imitators and … the rest. Right now, we are in a phase led by innovators. But once momentum begins, adoption movees fast and within 12 months, I expect the dominant group will be the imitators. ‘The rest’ will rapidly become history.

What is the technology impact?

When I use the term ‘contract management’, it is meant in a lifecycle context, from inception of requirement to completion or termination of performance. The new technologies – artificial intelligence, natural language processing, blockchain – are starting to impact every phase of this lifecycle. Here are a few examples:

  • A blockchain-based pilot that handles the entire contract award process, from loading of bid through supplier selection to executed agreement. In this pilot (involving some 5,000 suppliers), the award cycle was reduced from an average 110 days to 4 days, eliminating the need for manual interventions.
  • An AI system that evaluates contract terms against established standards or ‘norms’, highlighting variations for review / risk mitigation. It then learns from the mitigations and is now starting to propose responses to non-standard terms.
  • AI and NLP systems that undertake mass-scale analysis of contracts, identifying trends or extracting common elements. Analysis of thousands of agreements is often complete within hours, enabling informed business decisions, or identifying areas for update or improvement. For example, the system undertook analysis of a portfolio of real estate contracts and established relative value of leases related to operational costs and revenues, supporting renegotiation of the leases.
  • Digital technologies such as chatbots and animated videos that increase user efficiency and reduce operational costs, including a reduced the need for review and approval.

Pressure for change

A recent survey by IACCM illustrates the limitations of today’s typical process when compared with these innovations. Even when automated, systems in many cases rely on standard templates and provide limited data. For example, more than 65% of organizations admit that they do not reconcile the financial performance of their contracts. Contrast this with advanced systems that not only track precise financial data on individual agreements, but can also undertake analysis to understand how contract terms or models impact profitability.

Contract-related activities represent a major source of operational cost in most organizations and this is not only becoming increasingly visible, but also increasingly avoidable. For those who undertake contract management today, 2018 represents tremendous risk or tremendous opportunity, depending on approach. Many of the innovations are not being sponsored or driven by contract management or procurement groups – a situation which puts them under very real threat.

It is time to understand and embrace the changes now occurring, to become a visible advocate and innovator within your organization.


Supplier Relationship Management: Victim or Savior?

In a year-end report, IACCM highlights the continuing immaturity of most Supplier Relationship Management (SRM) programs. While a minority of organizations are generating substantial benefits, for most the investment in SRM is minimal, leaving it often fragmented and under-resourced.

The IACCM report, based on a survey conducted in December 2017, reveals that top-performing programs are yielding returns equivalent to 11% or more of spend, in particular through progress in innovation and efficiency. For these leaders, negotiated price reduction takes a back seat. However, this enlightened approach is far from being the norm. In most organizations, SRM either does not exist in any formal context, or is seen as a sub-element of Procurement, often driven by the same motivations and measurements.

It is this subservience to Procurement that raises real questions. Many commentators agree that the era of squeezing suppliers for price reductions is coming to an end. If they are right (and it could be argued that in fact a new era based on automation is about to begin), then Procurement needs to shift its focus towards lifecycle costs and value. This requires an understanding of how to evaluate and sustain high performing relationships.

Those who have developed successful SRM programs recognise the need for skills and tools that are rarely found in Procurement functions. That is why, when operating as a sub-group in Procurement, SRM has generally struggled to make an impact. Frequently it becomes entangled in political battles over role and authority, resulting in limited internal impact and leading to confusion for suppliers.

Yet for Procurement to flourish – some would say to survive – it desperately needs to raise its business contribution and SRM is the most obvious source of additional value. 2018 looks like it may be a pivotal year when we will start to see more intelligent discussion about the positioning of SRM. For example:

  • can SRM prove effective within a traditional Procurement function and if so, how should roles, responsibilities and authorities be divided?
  • should Procurement itself be sub-divided, with traditional roles increasingly automated and outsourced and a new management group established for key suppliers and major contracts?
  • as businesses become steadily more dependent on their ability to form and manage external relationships, should major elements of SRM and CRM merge, to become an integrated function that oversees and enables trading relationships in every form?

IACCM will continue to lead research and discussion on these important points, as well as offering its members the training and advisory services they need to handle the critical changes affecting every organization.

For those who prepare, 2018 promises to be an exciting year, with many opportunities for growth.


Culture and Commercial

Organizational culture is becoming an increasing area of focus for every business. As recent events have shown, the speed and power of social media activity demands heightened sensitivity and rapid response mechanisms. Shifts in social expectations (as well as global variations in those expectations) result in often unpredictable pressures that can instantly impact corporate reputation.

This challenging environment means that organizations must increasingly review their commercial policies and practices. For example, traditional measurement systems have often led to damaging behavior – whether it is placing unfair pressure on small suppliers or using unethical practices to win sales. Partnering programs and the selection of suppliers are also high risk areas, with potential ‘guilt by association’. In some cases, policies and practices are driven by regulation – for example, the use of conflict minerals or child labor. In others, it is about avoidance of possible litigation – for example, discrimination or sexual harassment. But there is also a growing need to exercise judgment on a wide range of decisions that impact organizational image and these, it is suggested, are in many ways best addressed through a clear and common ‘culture’ – a set of norms and values espoused by all employees.

There is current debate over where ‘cultural responsibility’ should reside. For example, given the frequent role that the General Counsel has over compliance issues, should they also be the ‘custodian of culture’? Ultimately, the tone may be set by the Board, but there needs to practical oversight and implementation.

It seems to me that there are two linked but distinct aspects to this topic. One is the internal manifestation of behavior and the other is external – the link to society and markets. It is this latter aspect that is especially relevant to commercial teams, who are in many ways uniquely placed to be making the sort of balanced judgments needed to manage reputational risk. Lawyers and the law are fundamental considerations in making ethical and reputation-enhancing decisions, but this is only one aspect. Recent incidents that are damaging corporate reputations are mostly not illegal – they are simply reflecting corporate values and cultures that are increasingly alien to societal norms. Trying to keep pace with those trends and making smart commercial decisions requires careful and inclusive analysis and counsel.

Twenty years ago, many corporations had powerful commercial groups with clear responsibility for business practices and ethical standards. The forces of globalization destroyed most of those groups because they were seen as an impediment to getting business done. Management focus shifted to ‘growth at all costs, ethics be damned’. Steadily, the world has come to realise that such approaches destroy environments, undermine society, drive inequality and dishonesty. So we are at a point where we need to rethink approaches to decision-making, ensuring that short-term expedients are not at the cost of longer-term interests. Perhaps that means appointing an ‘owner of culture’, but I suspect it is more about designing effective and streamlined review and approval processes that clearly include ‘social impact analysis’ as a core element of risk assessment.

What is the role of the private sector in Open Contracting?

A guest blog by Sally Hughes, Chief Operating Officer of IACCM

Social trust is high on the political and corporate agenda. Open contracting is attracting growing attention as one way to increase public confidence in the transparency and integrity of business and government dealings. To date, the private sector has had limited engagement in the debate on open contracts and many legal and contracts professionals show scepticism about its practicality. But with 23 governments having signed up to the principles of Open Contracting, and with active interest from institutions such as the World Bank, OECD and World Economic Forum, it is surely time to engage.

Last week, I represented IACCM in a fascinating keynote panel discussion at the 2017 Open Contracting Conference held in Amsterdam.  The session was moderated by Adrienne Klasa, Editor of This is Africa at the Financial Times Group and my fellow panellists made up a distinguished group, bringing diverse perspectives on the subject of Open Contracting. Dr. Eber Omar Betanzos Torres is the Undersecretary of Public Administration in Mexico, who through 2017 has been the Chairperson of the group of 5 governments, (Colombia, France, Mexico, United Kingdom and Ukraine,) who founded the “Contracting 5”, leading the work to foster openness, innovation, integrity and better business and civic engagement in government contracting and procurement.  Last week it was announced that Argentina would join this group, formally making it the Contracting 6; Zuzana Wienk is a member of the Steering Committee of the Open Government Partnership as well as founder and program director of a leading Slovak political watchdog – Fair-Play Alliance; and finally, George Ofori, Deputy Chair of the CoST (Construction Sector Transparency Initiative).

Open Contracting – The Future

The panel’s remit was to look at the future of Open Contracting, to try and cut through the hype and discuss and debate the strategies needed to maximise its impact; can it be the new “normal” in the next 5 years?  It is a lofty aspiration.  IACCM was particularly requested to comment from a private sector perspective, looking at the role of the private sector in accelerating the Open Contracting agenda and the actions that they can specifically take.  The private sector was notable in its absence at the conference and therein lies one of the first challenges – how to get them in the room?

At IACCM we are in the fortunate and privileged position to be working closely with both private sector and public sector; indeed, having started out 18 years ago as an Association that was founded in conjunction with a small private sector group, the percentage of our membership from public sector has grown exponentially over the last 7 years, the reasons for which are the subject of many other blogs.  There is no doubt that governments around the world are driving commercial reform initiatives, from upskilling staff, streamlining processes and even attempting to simplify contract documentation.  However, when I speak about these initiatives to companies that supply in to government, the response is universally along these lines, “It all sounds very interesting, but the reality is that our experience working with governments hasn’t changed, it’s still the same old unwieldy and unnecessary complex documentation seeking to allocate unreasonably onerous risk to the supplier, still the same old bureaucracy, still ultimately the same old lack of transparency.”  So, no wonder then that the private sector is sceptical.

What are the incentives?

There are certainly incentives for the private sector to get on board with the Open Contracting initiative; those organisations that care about trust and integrity, care about their reputation, should be at the forefront.  However, if they are not observing any change from governments, despite the work that is clearly underway, then the incentives largely disappear, it’s viewed as one way traffic.  There are so many other questions to pose:  What are people going to do with the data if it is publicised; are they really ready for it?  What about the arguments for the need for confidentiality in situations of national security?  How can we make “data” open and useable without significant investment in technology?  Even with the challenges that private sector is navigating in implementation of appropriate technology, this remains an area where public sector is woefully lagging in comparison.

Open Contracting is a complex issue and whilst I sincerely hope that it will have made significant progress in 5 years’ time, for it to be the new “normal” I fear is over ambitious; but we certainly shouldn’t be disheartened or distracted from maintaining that objective.

A need for open dialog

So, what is the role of the Private Sector in Open Contracting?  Firstly, it needs to come to the table and take the opportunity to influence the conversations on this important debate, but importantly the Public Sector needs to listen to the real challenges that are still experienced when working with government institutions; this won’t happen without open dialogue and greater publicising of the case studies demonstrating the successes that can be achieved through greater openness and transparency.  Sanjay Pradhan, CEO of the Open Government Partnership gave a moving opening presentation at the conference; he reminded us all that we need to move from commitments to credible implementations and we need courageous and committed leadership.


Open Contracting rises up the agenda

As digital communication steadily transforms social expectations, it should come as no surprise that there are growing demands for ‘open contracting’ – an end to the secrecy and complexity that masks business dealings and performance.

This week, a global forum in Amsterdam confirmed that Open Contracting truly is on the International agenda, raising understanding of the critical role that contracting plays in delivering fairness, transparency and value in trading relationships.

The players in this growing movement wield tremendous influence – organisations that include the OECD, the World Economic Forum, the European Commission, the BTeam, CoST, a myriad of national governments – and of course IACCM.

What’s it about? Increased efficiency, improved standards of governance and ethical standards are high on the agenda. While the drive may be largely from public sector, there is tremendous relevance and benefit for private companies. Greater consistency will reduce costs. Transparent processes will open opportunities to greater competition. Simplification will increase the chances of successful outcomes.

Ultimately, Open Contracting demands increased competence from both public and private sector. It requires a focus on skills, resources and systems that drive integrity in data flows and fact-based decision making. It is a program that has potential to deliver benefit to every citizen, everywhere. At last, high quality contracting has been recognised as a critical ingredient for global economic growth and success.

The IACCM vision and mission has taken an enormous step towards realisation and contracting is steadily moving up the government and business agenda!